Opinion By Chris Harmse, Co-Founder of BVNK
In a short period of time, cryptocurrency and blockchain has gone from being a niche area of finance to an increasingly integral part of corporate banking and treasury functions. According to a survey by Deloitte, 76% of senior executives believe digital assets will serve as an alternative to, or replacement for, fiat currencies in the next 5–10 years. Gartner forecasts that 20% of large enterprises will use digital currencies by 2024.
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The current challenge facing Chief Financial Officers and Treasurers is how best to manage their legacy currency operations with emerging cryptocurrency requirements across payments, trading, custody, and yield. However, as organizations get to grips with this challenge, a new breed of financial service provider is emerging to help create crypto-powered banking experiences.
Just as fintechs helped transform the banking user experience over the past decade, new crypto-banking platforms will become the next generation of banking infrastructure – in the process creating faster, more flexible, and lower cost services.
The key driver behind this shift is blockchain. Distributed ledgers enable banking platforms to structure financial services and transactions in new and more efficient ways, where trust is baked into the model from the outset and costly middlemen made redundant. This change signifies nothing less than the digital transformation of banking infrastructure, and the results will be unprecedented. Here are some examples of just how cryptocurrencies and blockchain will change business banking.
1. Enabling faster and more efficient payments and settlement
For fiat currencies, cross-border payments are fragmented and heavily regulated, leading to varying constraints depending on the jurisdictions involved. This fragmentation and complexity stands in stark contrast to our globalized and digital business environment.
Today, merchants wishing to deliver an international service must use a range of payment service providers to meet the individual requirements of each market they operate in. Similarly, companies must manage a large number of bank accounts denominated in the different currencies they use. Using SWIFT rails, international merchants lack visibility into their payments and are burdened by lengthy settlement times (approximately 3-5 days) and high FX charges.
The alternative afforded by blockchain and cryptocurrencies is as day is to night. Now, funds can be transferred within 24 hours to anywhere in the world using crypto rails (i.e., directly from one account to another). And costs are reduced with fewer intermediaries involved.
Indeed, it’s not just cross-border settlement that benefits from blockchain and cryptocurrencies. Regular payments derive similar benefits from faster processing times and much lower transaction costs thanks to disintermediation. International payment providers take huge commissions for their services, but in reality add little in the way of value. Crypto rails and wallets offer a compelling alternative.
2. Securing a high yield on assets
Once businesses have accumulated capital they put it to work. However, today’s record-high inflation rates and the associated impact on fiat currencies are causing treasury departments within organizations to look elsewhere to increase the value of their capital. With cryptocurrency, businesses are able to earn a yield on their digital assets at rates that often outperform traditional asset classes (Bitcoin is the best performing asset of the decade).
For organizations that do not wish to be exposed to the volatility of the crypto markets, there’s an alternative. Through advanced banking platforms, organizations can lend their digital assets to third parties, such as hedge funds, which use the borrowed assets for innovative trading strategies. To reduce risk, companies can leverage digital asset custodial solutions, which ensure that digital assets do not leave secure custody and are insured against cybercrime while there.
3. Decentralizing credit services
Decentralized finance (DeFI) is one of the most significant changes being brought about by cryptocurrencies and blockchain. Distributed ledgers remove the need for a trusted central bank (the hallmark of a fractional reserve fiat banking system). Rather, blockchain embeds trust and transparency through the underlying ledger of past transactions.
One use case for this approach is particularly compelling: DeFi credit services. Blockchain-based smart contracts allow two or more parties to lend or borrow directly, according to pre-agreed conditions and without the need for intermediaries. As a result, DeFi credit services have the potential to disrupt the traditional credit ratings-based approach to lending, where the rating agency and bank has total control over access to credit.
The implications of this shift are significant. Previously unbanked segments of the population and those with unconventional credit histories will be able to access credit. On a personal level that could mean all the difference to people struggling with rising costs of living.
Similarly, DeFi credit opens a new and dynamic source of credit for small businesses, and one which costs less than traditional lending thanks to the removal of expensive intermediaries. Such services could thereby help unlock growth for smaller organizations at a time when lending from banks remains stubbornly low.
4. Enabling real estate investment
Another way that businesses make money is through investments in real estate. However, as with payments processing, real-estate investments using fiat currency come with challenges, particularly in international settings. Companies can struggle for transparency into their investments and need to overcome the complexities of local investment rules relating to property.
Advanced banking platforms enable cross-border real-estate investments via digital tokens and in a way that is much more transparent and scalable than with fiat investing. Not only that, but the real-estate investment itself can be ‘tokenised’, that is represented by a digital asset on the blockchain – as tokens can be divided into smaller shares, this brings greater liquidity to otherwise illiquid assets such as property and rent, and broadens investment opportunities.
Real estate has also now been brought into the realms of DeFi, with real estate transitions being refinanced by participants in DeFi protocols – or the “bank of DeFi” – effectively removing banks from the real estate financing business.
Once again, by reducing the need for intermediaries, cryptocurrencies lower the cost of real-estate investing, while also providing a means by which companies can manage risk.
Like fiat, only better
For the next few years at least, the majority of organizations’ financial dealings will be in fiat currency. But the balance between fiat and crypto is changing and the adoption of the latter will only accelerate. New banking platforms have emerged to help companies manage this transition by bringing together both elements of their core business banking. But as the benefits of cryptocurrency become clearer, and businesses experience the full benefits of empowered, disintermediated, and agile money management and banking, it won’t be long before fiat currency starts to seem like an outdated monetary technology.